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Stricter Disclosure Rules Fuel Exec Salary Debate

April 19, 1993|By Bill Barnhart.

Howls over megabuck executive pay are intensifying again during the annual-meeting season. Ironically, this year's complaints are grounded in better compensation data that corporations are publishing in their annual-meeting proxy statements.

In addition to requiring relatively uniform charts detailing salary, bonus and other compensation for a company's top officers, new rules by the Securities and Exchange Commission require the compensation committee of a company's board to explain the executive compensation program in the proxy text. The committee also must place its pay decisions in the context of the company's performance.

A review of some of the compensation committee reports issued by major Chicago-area companies indicates corporate America is trying to get into the spirit of the new disclosure rules. The writing contains a minimum of boilerplate, although many stock phrases appear, such as the need to "attract and retain" talented and experienced executives.

In these new reports, compensation committees attempt to link pay decisions to quantifiable company results, especially results that affect shareholders' investment returns. It's no accident that linking executive pay to a company's performance is gaining favor at the same time as the new disclosure rules. But any shareholder looking for a simple cause-and-effect formula for executive pay will be disappointed.

For example, Robert Krebs, chief executive of Chicago-based Santa Fe Pacific, enjoyed a 40 percent increase in his bonus last year, to $443,403 (his salary was unchanged at $450,000), although the company posted a 34 percent decline in profits from continuing operations and its stock price dropped 8 percent during the year.

The committee said the bonus increase was based on revenue growth at the company's Santa Fe Railway operation and the achievement of certain intangible "personal goals," including the development of a corporate strategy, organizational effectiveness, efficiency and customer service.

At Safety-Kleen in Elgin, CEO Donald Brinckman got an 11 percent increase in salary and bonus last year, to $594,130. Profits dropped the same percentage, 11 percent. The stock dropped 8 percent.

In awarding Brinckman's salary, the committee considered salaries of CEOs of comparable companies, Brinckman's longevity with the company and "his stature in the community and the industry."

The pool of money available for executive bonuses, including Brinckman's, is based on growth in Safety-Kleen's return on equity relative to the return of the Standard & Poor's 500 companies, a justifiable measurement of company performance.

In February, however, the company's board, on the advice of the compensation committee, excluded from the 1992 return-on-equity calculation the $9 million loss from the company's Puerto Rico operations last year and used instead the $5.7 million profit earned from those operations in 1991.

Careful reading of the new compensation committee reports will unearth similar examples of special-case and subjective judgments.

Perhaps Krebs' efforts at cutting Santa Fe's labor costs should be rewarded, even though the decision contributed to a $104.5 million net loss last year. When such one-time charges are excluded, the company's profits were up 53 percent.

Perhaps Brinckman should not be penalized for dealing with the environmental mishap in Puerto Rico, even though it cost the company's shareholders.

In any event, the compensation committee reports are serving their intended purpose of illuminating the CEO pay controversy.

MIDWEST CAPS

Placing caps on property-tax rates and assessment growth is in vogue throughout the Midwest, according to a new study by state and local credit analysts at Standard & Poor's. While politically pleasing, these caps threaten to undermine the safety of the tax-exempt bonds that are the lifeblood of many units of local government, the report concludes.

As the accompanying chart shows, Michigan, Illinois, Wisconsin and Minnesota are above the national average in reliance on property taxes and in per capita property taxation. S&P analysts Todd Whitestone and Jeffrey Panger say capping property-tax rates can be risky business when real estate values are declining in many areas.

"As credit analysts, we have to be concerned about the ability to repay debt," Whitestone said. The governors of all the Midwest Great Lakes states except Michigan have endorsed broad property-tax caps or rollbacks. The latest proposal to surface from Illinois Senate Republicans calls for the caps in place in the five collar counties to be extended to suburban Cook County, not statewide.